In 2003, the Check Clearing for the 21st Century Act was passed, requiring every bank to accept substitute checks, or image replacement documents (IRDs), which are electronic digital copies of paper checks. Accordingly, banks and other financial institutions are increasingly handling electronic financial items such as substitute checks. Standards for storing, sending, and receiving these electronic financial items have been developed and are presently being used throughout the financial industry.
For instance, the well-known Image Exchange Send standard defines requirements for electronic financial item information format, content, and transfer protocol. One of these requirements is that the sending financial institution must include an electronic endorsement record for each electronic financial item. When the sending financial institution is the true bank of first deposit (BOFD) the sending financial institution is supposed to include in the endorsement record a 26 Record (BOFD Endorsement Record). Where the sending financial institution is not the BOFD, such as for correspondent cash letter items, the sending financial institution is supposed include in the endorsement record a 28 Record (Subsequent Endorsement Record). Thus, financial institutions are required to include either a BOFD Endorsement Record or a Subsequent Endorsement Record for transmit items captured as paper and distributed under Image Exchange Send.
However, in practice it has been difficult to track BOFD items versus non-BOFD items and to apply the appropriate endorsement records. Due to the complexity of multi-tiered correspondent cash letter relationships, there has so far been no clear and consistent systematic or automated solution for accurately determining the true BOFD on correspondent paper capture items. Accordingly, some financial institutions have opted to initially include a BOFD Endorsement Record on all Image Exchange Send eligible items, regardless of BOFD status, and to take on or pass through non-BOFD return items. While the impact of this stop-gap measure has not yet been excessive, it is not expected to be feasible as electronic financial items become the norm. There has thus been a growing need by banks and other institutions that handle electronic financial items for a way to address these difficulties.